Savvy CIOs know proper financial modeling is critical in planning any new IT initiative. However, many healthcare IT shops and consultants lack a comprehensive framework for financial modeling — and failure to properly estimate the total costs of a project could compromise it before it even gets off the ground.
“CIOs can only go to their Board once for funding requests, so they need to be comfortable that their numbers reflect the true total cost,” said Zahid Rathore, Senior Vice President at Healthlink Advisors. “In the health IT consulting industry, everyone says they can do financial modeling, but no one has the perspective that our team brings to the table — and no one does financial modeling better than us.”
Healthlink Advisors uses several types of analysis to provide best-in-class financial modeling services to IT teams, including:
1. Total Cost of Ownership (TCO) Modeling.
TCO modeling looks at how much it will cost to buy software or services over a given period — typically 5, 7, or 10 years. The team looks at capital, one-time, and recurring operating costs to determine potential cost savings or increases resulting from software, hardware, or staffing changes — including payback period and break-even analysis if desired. Common TCO modeling uses include:
- System and service selections
- IT operating model scenario comparison analysis
- Identifying capital costs/impact
- Focused scenario analysis, including insourcing/outsourcing analysis
- Application/service rationalization for a specific project
- Strategic decision-making that balances cost and institutional needs to determine the optimal go-forward strategy
“This type of analysis serves as a critical input for a business case that shows project costs, as well as potential revenue-generating and cost-saving opportunities,” said Rathore. “It can also serve as a precursor to value modeling.”
2. Return on Investment (ROI) Modeling.
ROI modeling analyzes total project costs against net profit projections on a specific and detailed level. Like TCO modeling, ROI modeling can include a payback period and break-even analysis, but it provides more detail on profit/loss projections than TCO modeling. Common uses include:
- Evaluation of certain types of implementation, such as enterprise resource planning (ERP)
- Application rationalization
- Service line expansion analysis
- IT services provisioning, such as Community Connect
“ROI modeling should be used if there are key revenue-generating or cost-savings opportunities that would be part of the project or to identify options to accelerate ROI and enable strategic organizational growth,” said Rathore. “We aim to answer the question, ‘If I do this, will I make money?'”
3. Value Modeling.
Value modeling, also known as impact analysis or benefits analysis, models the potential benefits that could result from a project. Although value modeling does not include ROI modeling, it leverages TCO modeling to determine the potential financial impact of soft costs and intangibles. Common uses include:
- Evaluation of vendor-stated benefits and capabilities, such as employee engagement and retention, clinical and quality initiatives, and reimbursement strategies
- Evaluation of emerging technologies
- Supporting negotiations with vendors
“In one example of how we used value modeling, our team studied real-time EHR data and predictive alerting and found that a hospital system could prevent 57 sepsis deaths per year by switching to Epic,” said Rathore. “Here, we’re looking for specific clinical or financial benefits and their value.”
4. Portfolio Rationalization Modeling.
Portfolio rationalization modeling involves a point-in-time analysis that examines the current IT environment to identify duplication and cost savings through rationalization, process improvement, and other changes. This type of analysis enables standardization of the portfolio of solutions and services and allows for comparative benchmarking to determine if spending aligns with similar organizations. Common uses include:
- Application rationalization
- Enterprise architecture design and deployment
- IT support model optimization
- Data archiving rationalization
- Storage architecture and management
- Contract negotiation/renegotiation
“Portfolio rationalization serves as an input for developing a playbook that can guide IT teams on how to achieve identified savings,” said Rathore. “For example, we might look at imaging solutions used across a health system, identify duplication of services, look at the overall cost, and find opportunities for streamlining and cost savings.”
Through a prescriptive approach that focuses on the nuances of financial modeling, the Healthlink Advisors team provides the “at the elbow” support IT shops need to deliver a complete financial picture to their board while saving time and money.
“We’ve done so much financial modeling that we know how to account for hidden costs and understand where things can go off the rails,” said Rathore. “Our team can guide IT teams through the financial modeling process, providing stewardship support in accordance with the organization’s ESG [Environmental, Social, Governance] benchmarks.”